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Sunday, August 29, 2010

Market Thought... Robbin's Bears

Thanks to Friday's action, the SP500 is still trading in its March 2009 trading dynamic I pointed out in the Market Though post 'closer look'.

Since everyone and there mother are seemingly bears now, I figure I look at their argument much closer. The premise of the realistic bear argument (aka Robbin's Bears) is what was described by Tony Robbins via Youtube: 70% of the American economy is driven by consumers, and their level of consumption is in decline. There by causing the American economy to slow. Hence the markets will go down. (All other arguments are low-probability 'Lehman type' events that I think will not happen as central banks and governments will prevent due to the fragile nature of the recovery.)

Over the past few weeks the SP500 2011 estimates have been reduced. This giving legitimate justification for the market's decline in August. (see article) The SP500 went from an average $96 earnings estimate to $87 earnings estimate.

Historically, the SP500 trades between a PE of 12-17, 12 being very inexpensive while 17 is stretching valuations. For this exercise lets cap the top-end PE at 15. As per the $87 earning estimate the low end potential range for the SP500 is 1044 (87 x 12), while the high end is 1305 (87 x 15).

That does not seem so bad, but if we assume an even more bearish undertone and think the trailing PE of the SP500 will reach 10, then the market target is obviously 870. In my most humble unqualified opinion, a PE of 10 would completely negate the global growth story taking place with the BRIC countries and normal economic activity, even if there is low economic growth in America, Europe or Japan. Remember, low economic growth in Europe and Japan are baked into estimates, they have not been growing for quite sometime. So, the only adjustment is the US economy, and the American economy slowing down to 0-2% GDP growth does not merit an SP500 multiple of 10 when so many companies have high BRIC exposure.

I tried to pin-point exactly how many SP500 companies have a high % revenue/earnings exposure to BRIC, but could not find a definitive number. (I would have to pay for that type of info with no research team at my disposal.) BUT, the one thing I found VERY interesting was a 1yr and 8month SP500 chart over the BIK (ETF consisting of 40 large BRIC companies) chart.

To my complete surprise, the charts match up very nicely. (I was expecting the BIK to out perform somewhat.)

Basically, this chart tells me the SP500 is pretty connected to the BRIC economies.

If this is true, why should the SPs500 trade at a multiple of 10, 11 or even 12? Why not 15 given the growth prospect via the consumer in BRIC?

This also adds fundamental support to not break from the SP500's current trading dynamic.

If anyone questions the relevancy in the BRIC economics go to the SEC.gov website, search for a company your interested in, and open their most recent 10-Q. Here is IBM's as an example. Do a 'control+F' (on the key board) to search the document for "BRIC", and you will be able to see for yourself the growth coming from BRIC.

I wish I was in the room with Robbin's Bears (or a high profile somebody with a realistic perspective) to shed a different light on their negativity before scaring the "uneducated".